Top 3 Tax Strategies Your CPA Could Be Missing

As a firm that has been in existence for 60 years, we’ve seen all there is to see in reviewing tax returns in the marketplace. Some are a little… out there. Some are great. Many are well prepared, but end up missing on some opportunities. That’s why we prefer to work with our clients on a monthly basis. It allows us to not only prepare the returns, but create and implement tax strategies to put you in the best position possible. I’ll cover what we find most frequently as missed opportunities in the marketplace.

First, the most frequent strategy that generally garners the biggest reward: Compensation structure for S Corporation Owners.

How does this work? Let’s start with an illustration. You open a business and need $150k in compensation to comfortably live your desired lifestyle. So the easiest thing to do is just take a $150,000 salary from the business. Easy peasy.

What if I told you if you did that, you left $20,000 on the table.

Ouch. What can I do to prevent this?

Profit Distribution for Tax Savings

Let’s assume you look up average salary for your role in the business and it’s $60,000. That covers reasonable compensation for your role to the business. Now, you need a $90,000 raise to get what you need from the business. Solution? Take a profit distribution. Let’s illustrate the tax savings on this structure:

$90,000 x 15.2% (employer and employee portions of FICA) = $13,680
$90,000 x 20% (qualified business income deduction) = $18,000 x 30% (avg. income tax rate) = $5,400

$13,680 + $5,400 = $19,080 in tax savings.

That’s the difference between bringing a completed set of financials to a tax preparer in the middle of tax season versus working with a monthly accountant.

Next, let’s look at Entity Level Tax.

Entity Level Tax

This is a relatively new opportunity that will catch up with most preparers, unless they change the tax laws again (which could very well happen come 2026).

How does this benefit me?

Currently, if you are even lucky enough (or maybe unlucky) to itemize your deductions, the state taxes you pay, including sales, property, and income taxes are limited to $10,000.

Here in Illinois, most of us hit that limit with property taxes alone. That means all the state income taxes you pay on your business profits – let’s assume the $90,000 from the last example – are non-deductible. So, states like Illinois decided that they need to help offset their high tax rates. So, they came up with a loophole called entity level tax.

This loophole allows you pay your state tax as business tax instead of personal tax. But what does that really do for you? Let me show you.

On the $90,000 of profits, Illinois charges 4.95% tax on those profits, whether you pay them at the entity level or the individual level. That’s $4,455 in state tax. Normally, non-deductible personally. However, now it’s a business deduction since we assessed it at the entity level. Let’s just say you pay 30% in federal taxes. That’s $1,337 in tax savings. Not bad for paying the same tax a different way.

Word of caution: not all states work like this. Wisconsin business owners will need to be in a high tax bracket to gain benefit. Be sure to consult with your advisor.

Now that we’re over $20k in tax savings, let’s look at the third often-missed tax strategy.

The qualified business income deduction

We illustrated the power of savings with this deduction in the compensation structuring example, but let’s dive in to what it is exactly and where we often find it being underutilized.

Qualified business income deduction is a 20% deduction of the profits generated from qualified businesses. Specified service businesses do not get the benefit at higher income levels (think professional services accountants, attorneys, doctors, etc… or celebrity-esque actors, musicians, athletes).

Now, this deduction is limited by a multitude of factors: income levels, wages paid, and UBIA (cost of assets), but oftentimes it pretty cut and dry.

So we see this deduction missed in a few different scenarios:

1. Business is misclassed as a specified service trade or business. For some not familiar with this designation, you might assume all service businesses fall in this category, or maybe you don’t understand what the business truly does.

2. Real estate. Real estate taxation is tricky, and so is interpreting if real estate rentals qualifies or not. Our take? It almost always does. We don’t see this consistently happening on returns we review.

3. Miscalculations or missed structuring opportunities. Miscalculations could come from numerous things, but most of the time it’s from poor record keeping of depreciable assets. Other times it’s record keeping around Qualified Business Income carry-forwards. These are more likely if you have switched accountants several times.

Missed structuring could come from more complex structures and groups of businesses. Sometimes, you have two different activities in a single business — one is a specified service trade or business and one is not. Think of an optometry office where the retail of eyewear is not a specified service business, but the exams and other medical services are. In this example, you need to keep detailed records of profit and loss and allocate your business profits for the two activities.

Additionally, you may have a high profit business that pays little wages, where the deduction is limited because of it. Conversely, you could have a low profit business with low wages. You can aggregate the two businesses and get the wages for the one to get the deduction benefit of the other. Yes, that’s super complex.

As you can see, there are much better tax strategies you can implement rather than trying to deduct the cost of your dog (well… there’s always a way!).

If this article has you as exhausted as I was writing it, click the 'let’s chat' button and learn how we can guide you through these complicated, but oh-so-beneficial tax strategies.